UK Inflation Adds to Legitimacy of BoE Monetary Guidance

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UK annual inflation fell back slightly from a yearly high, thereby signaling that the BoE’s expectation for inflation to fall below 2.5% over the next two years is a realistic one.

UK consumer prices were reported to have risen 2.8% over the 12-month period ending in July, which both met expectations and declined from the 2.9% annual inflation rate in June. Consumer prices were unchanged on a monthly basis, according to the UK Office for National Statistics.

Input costs for UK producers rose 5.0% on an annual basis, the biggest annual rise in over a year, according to a different report. Meanwhile, the retail price index was unchanged on a monthly basis in July.

Inflation now has a more defined role in Bank of England monetary policy, according to the inflation report released last week. The report said that interest rates will only rise after unemployment falls back to 7%. However, the reliance on unemployment would be ‘knocked out’ if inflation fails to fall within 0.5% of the BoE’s 2% target inflation year within the next two years. Although the BoE expects inflation to fall back towards 2% within 2 years, a rise in Pound following the report release attested to traders’ skepticism.

Therefore, a bigger than expected decline in inflation would have been Pound negative. The Pound erased earlier losses against the US Dollar following the as-expected release. Resistance may now come in at 1.5518, by a rising trend line from early July, and support may be seen by a broken resistance line around 1.542.

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